It has become customary, in the first few weeks of January, to lay out forecasts for the rest of the year. Analysts from the London-based Economist Intelligence Unit (EIU) to the World Bank get the chance to wipe clean their slate and begin a new framework, maybe with a little carried over optimism from the holiday season. Not so for Lebanon, where the omens from the international financial community do not augur well as, contemplating the undelivered promises of Paris 2, we are left to ponder the immediate future with few signals of any improvement, and frankly, not much momentum except hope, as most of the body politic focuses on the presidential possibilities and the never ending “regional circumstances”.
The EIU report makes sober reading as it predicts Lebanon’s fiscal drama to continue unabated. The 2004 budget contained nothing that would change this trajectory, with the government set to overshoot its 2003 targets by a whopping 30%. With the poor state of the economy, which is growing only in a statistical sense, the fiscal drag is worse than ever. Debt servicing is at a staggering 42% of total public expenditures, and 15% of forecast GDP. This makes it is hard to imagine a worse situation especially in the context of the continuous bipolarity between president and prime minister, which seems to have all but paralyzed the political process. At a time when one would expect political debate to be the engine of reform and the budget a pivotal point of discussion for the future, the bickering continues to “crowd out” real economic imperatives, and the media, and public appear mesmerized by the nonsense of elections. At a time when we need the troika machine to be well lubricated, the divisions intensify and credibility, especially on Paris 2 pledges goes by the wayside.
While it is true that the $3.5 odd billion from the banks will provide some relief to public finances, the whole economic and fiscal architecture seems more fragile than ever, with debt making any stimulus from government impossible.
The tourism sector, which fared well in 2003, with approximately 850,000 visitors (a shade under the 1 million trumpeted by the government), is possibly the only bright spot. Mind you, none of the improvements are due to any policies or plans by the snoozing leadership and the packed hotels, restaurants, and beaches are pleasing, but are not sufficient to revive an economy. With many Arabs preferring the proximity of Lebanon, in the current state of the world, their influx has brought some deposits to the banking sector, and emptied some hotel mini bars, is but a drop in the ocean. It simply isn’t something that can trickle down enough to affect economic growth. Though many politicians point to tourism as a potential savior, the figures suggest otherwise. What has kept the economy from completely imploding is a phenomenon that is totally beyond the government’s reach. It is primarily the inflow of expatriate money. This underground economy, if you will, has maintained many households’ purchasing power, and has served to offset the contractionary effect of fiscal tightening and high youth unemployment. The end game is really the ability to attract investment, and in this category, the signals into 2004 are not encouraging. The EIU tells us that commercial bank credit to the private sector, a gauge of investment activity as well as the pace of domestic spending, had fallen in the last quarter of 2003, and that despite a huge drop in interest rates. This is alarming, frankly, as one would think that a 7% across the board fall in borrowing rates. Even more eye popping, was the 90% fall in net credit to the industrial sector in the first three quarters, and of course, more deterioration in the agricultural credit numbers. So much for policy. Construction, more a testament to continued private investment in real estate than any government initiatives, continued to fare better, and may carry on into 2004. On the trade front, a falling Euro may bring some relief, but overall, the situation is fairly benign and does not presage any significant improvement in spending.
Having looked, briefly, at the key data points, it is worth pointing out that the most relevant issue for the Lebanese economy going forward is not so much the actual economy but confidence. This is where there has been the most clear devastation. Confidence in the ability of the current caretakers to come up with workable plans, and in the notion of political and institutional reform is far more important for Lebanon. Without credibility, that somewhere in the future, change is on the way, direct investment, the lifeline of any emerging economy, will lag. The political bickering, and the accompanying economic reform paralysis are likely to converge with deteriorating debt conditions, and impose a serious speed limit to real economic growth. Attracting investment without at least creating an impression of political movement is a futile endeavor. Investment requires, most importantly, delivering on promises, and creating the right environment. The telecom fiasco, the lost opportunity on privatizations in general, and the continued tribalism of the political system are, for 2004, the natural obstacles to any real improvement in the economic fortunes of the country. Meanwhile, the drain of young Lebanese talent continues, and the banking system, stuck with the debt addiction of the public sector is unlikely to provide the necessary catalyst to private enterprise and capital spending.